Why HUI?

Why HUI?

HUI was the top-performing US stock sector of last decade. However, most people have never heard of it. Even many investment professionals have still never heard of it.
First, why did this entire sector of US stocks rise in value from 35 to over 600, a gain of about 1600%? Note that in the same period of time, airline stocks, technology stocks, housing stocks, and financial stocks were competing for the biggest losses. I’ll address that below.
Next, why do so many people who present themselves as credible experts and competent advisors still not even know which US stock sector did the best last decade (not to mention which one will do the best next decade)? Why have so many never even heard of the top-performer?
Perhaps it is because they lack motivation. I say that because, in early 2003, I was looking for top-performing stock sectors and I easily found details on the internet of HUI’s recent performance. It could not have been much easier to find.
Specifically, I found that HUI had already gained several hundred percent in the prior two years. I immediately researched it and quickly understood a simple reason why the HUI sector was doing so well (and the short answer is “ballooning profit margins”). In early March of 2003, I published an article in which I concluded with a focus on the future opportunity of investing in HUI (as well as making a clear warning about the rocketing risk of real estate investing and also explicitly forecasting that commodities would continue to outperform stocks, and all of those emerging developments were popularly recognized within several years after my first published forecasts).
What is HUI and exactly why did it gain over 1600% in 10 years
So, HUI is a group of 15 companies. In a way, they are like real estate companies, but for a very specific kind of real estate: mines full of precious metals. The companies of HUI do not just own the mines, but operate them. Also, the companies of HUI operate using business practices that are more conservative than the companies of the otherwise similar XAU index.
Another difference is that the companies of HUI owned many relatively inactive mines. By relatively inactive, I mean that the mines had plenty of gold and silver in them, but the cost of extracting the metals had been too high to make much of a profit, at least when metal prices were bottoming in the year 2000. So, the metal in the mines was being extracted at a conservative pace, rather than as fast as technically possible. Maybe there had been some metals concentrated near the surface of those mines that had been cheap to mine even with the older technology of prior decades, but those deposits may have already been emptied.
Imagine that a mine had a small amount of gold accessible at a cost to mine it of $300 per ounce, plus a larger amount accessible for a cost of $400 per ounce, plus an unknown amount of gold even more expensive to reach- so expensive that the mining geologists might not have even bothered to estimate the amount of gold in there. So, if the market price of gold was $299, a mine might have no immediate value at all, since the expense to mine any of the gold was higher than the revenues available from selling the mined gold. However, what if the price of gold rose to $350 or even $450?
Even if there were to an expectation that the price of gold might rise, what would that do to the perceived value of such a mine? As prices of gold and silver rose in 2001 and then even more in 2002, the value of the mines rocketed. Mines that were nearly worthless in 2000 soon became mines that offered huge profit margins of hundreds of dollars per ounce of gold.
So, the key to the value of the companies of HUI was the perceived future value of their mines. If prices of gold and silver were rising and were also widely expected to keep rising, then the mines of the HUI companies would be considered more and more attractive. However, when prices of gold drops, the profit margin of those mines would drop with it. Further, if popular expectations of the future price of gold were to drop, then the stock prices of the HUI companies could plummet.
In fact, that is exactly what happened in 2008. As prices of silver fell more than 50% in only 4 months starting in the summer of 2008, the prices of the HUI sector fell nearly 70%.
So that is about why HUI did so well: the rising value of the mines owned by HUI. The mines rose in value because of rising prices of silver and gold, as well as popular expectations that silver and gold would continue to rise.
As for why so few advisors know the top-performing US stock sector of the last decade, know why it did so well, or publicly emphasized the opportunity of HUI back in the early 2000s before the rise started or early in the rise, that issue may not be as interesting as another related one. Why did some researchers seek out the best opportunities and understand them and report on them to the distinctive benefit of those who apply their prudent research?
Since I was one of those researchers, I assert that the best answer is prudence (which is why I called that research “prudent”). Yes, a lack of motivation (as in not much profit motive or mutual interest with their clients) could be a factor for so many mainstream advisors who missed what was obvious to so many others, but motivation is only enough to begin the process. Motivation allows for those who also are distinctively intelligent to demonstrate not only motivation but intelligence, and the two combined are what I am calling prudence.
Now, let’s consider, at least briefly, what prudence points to today. By 2004, I concluded that the most important development in global economics was not relating to gold or silver, but to another commodity, and one that is traded in much greater volumes that those metals.
Not coffee, not sugar, but crude oil. In my 2004 publication “The Real U.S. Deficit: Oil,” I began to focus on the geology of diminishing deposits of cheap oil. Naturally, as the cheapest oil to find and extract was used up, oil companies looked for oil that was more and more expensive to find and access.
Did oil prices blow out metal prices?
Why did silver prices fall over 50% in 4 months of 2008? The overall expectations about the global economy is one factor. As people started to be more concerned about cash to cover their debts, they were dumping silver, especially silver that they had borrowed money to buy. But even more specifically than any general financial trend of lending, borrowing, buying, or selling, I assert that it was clearly the spike in prices of fossil fuels which interrupted long-standing global economic trends, including the surge of investing in silver.
In fact, even mining operations were directly effected by the high price of oil and other fuels used in their mining operations. In 1999, oil was only $11 per barrel. In 2008, oil spiked up to $148. Imagine what would happen to your own business if a raw material that was a big part of your existing operating expenses rose by over 1200% in 9 years. Notice what happened to airlines from 1999 to 2000 as oil doubled in price (blue line below): a 40% decline (red line below). What is one of the biggest expenses of airlines: fuel, right?
The reversal of price trends for oil and gasoline in 1999 is a change that is important to the global economy and is the obvious choice for the primary cause of the shift in global stock prices peaking by the year 2000, in particular the collapsing of prices of airline stocks starting in 1999.
As investors were spending more in 1999 on fuels like oil, their perceptions about the future value of airlines naturally plummeted, considering that any expectation of a continuing rise in fuel prices would naturally shrink the profits of airlines. In fact, within a few years, several major airlines in the US were bankrupt. Oil prices continued to rise while the recent top-performer of the 1990s, high tech stocks, plummeted.
The NASDAQ 100 fell more than 20% in the first two trading days of April 2000. By 2002, it was down 83% from it’s all-time high in 2000. Could the continuing rise of oil prices have been a major factor in that 83% decline (and the relatively muted rebound since 2002)?
So, in my 2004 publication, I first used the term “The DominOIL Effect.”  (See www.TheDominOILeffect.com) It references not only the geology of declining supply, but also the economics of rocketing demand, resulting in changes in the financial measurements of oil prices (a rise from $11 in 1999 to $148 in 2008), plus a whole series of predictable consequences: a larger portion of budgets goes to purchasing fuel, then those most dependent on competing for diminishing supplies of imported oil- including industries (airlines), households, and regions (Japan, EU, desert cities of the US)- will face budget crunches, then will lend less and spend less on most anything except fuel, so prices of many investments as well as goods and services will plummet (airline stocks, tech stocks, housing stocks, real estate, financial stocks, silver, etc), eventually leading to predictable changes in the economic affluence and political influence of various regions worldwide.
So what is the next HUI (or the next crude oil)?
As oil prices rise, what can be anticipated in regard to the perceived value of the various oil deposits that are relatively expensive to access, such as the oil sands of Alberta province in Canada or deposits of oil deep under the water of the Persian Gulf? What is predictable about the companies and local economies related to those deposits if prices of oil continue to far outperform all other commodities?
Just as the major oil companies of XOI are like the major mining companies of XAU, is there a less prominent group of conservative oil companies that are functionally similar to the HUI mining companies? Do they also have ample oil reserves, but relatively expensive to access?
Actually, I do not know. It would not be especially challenging to find out, but let’s focus for now on the absolutely simplest of issues: redistribution of wealth and power to certain regions of the planet.
For individual companies, the actual cost of extracting and refining oil can vary considerably depending on the deposit. Also, it is possible that a new deposit will be found, such as in Utah, that would diminish the relative value of a top oil-producing US state, Alaska.
But what is easiest to forecast is regional prominence. As the US and USSR were the top two oil-producing regions of the 20th century, they rose to economic and then geopolitical dominance as superpowers. However, Saudi Arabia has been the top-producing country for several years now. Could they be the next country to attain superpower status, as oil-importing regions that have been geo-politically prominent (like Europe, the US, and Japan) face economic instability?
As of 2008, the balance of global productivity of oil has already made what geologists expect to be a permanent shift. The non-OPEC regions (including both the US and the Former Soviet Union) are forecast to produce a smaller and smaller proportion of the total global production of crude oil, with OPEC nations currently only slightly ahead, but soon at a 2:1 ratio, then 4:1, then 8:1 and 16:1 and so on. When the OPEC nations produce 70%, 80%, and 90% of the total global supply of oil, could that also be a factor in their economic prominence and geopolitical dominance?

As oil prices rise, that does tend to increase production at deposits of oil that are relatively expensive to extract and refine. That is the same principle that took HUI to 1600% gains in a decade. However, the balance of power does not favor Alberta in the mid-term. As oil prices reach up to the level where production is profitable, that also multiplies the profit margins of oil refining in the middle east, where much more conventional (cheaply accessed) crude oil is available.
As those nations are enriched by high oil prices from importing developed nations, those OPEC nations may invest that wealth in to more refineries and so on and may increasingly be capable of quickly extracting more of their cheap oil, driving up production enough to chop down global prices. Even if shale oil reserves in Alberta result in that province doing better than neighboring provinces, the actual power would increasingly be with OPEC.
That general shift toward the economic dominance of OPEC nations is much more probable than the particular stock price of any particular sector or company. Control of the global economy will increasingly be centered o n OPEC (at least, in the absence of any relevant technological innovation).
Consider that oil-production has been the single most dominant cause of the shift in global leadership to various regions since at least the early 20th century. The US and USSR blossomed on oil production, and so are the OPEC nations. Japan and the EU may have uniquely unfavorablecircumstances, as their economic dependence on oil is not balanced by continuing local production, as in the US or Former Soviet Union.
So, by early 2003, I considered the HUI sector to be one of the most interesting long-term opportunities in the US stock market. However, the 1600% gain in a decade is to me just a baseline of what is clearly possible as an easy gain. HUI was just the top-performing stock sector for using a buy-and-hold strategy.
Just as the HUI sector was several times better than any other stock sector, certain strategies reliably perform several times better than other strategies that may be much more popular. Also, which strategy is best varies with time.
There was a time when speculative real estate flipping produced enormous unearned gains. However, speculative real estate flipping led many Japanese to bankruptcy by the 1990s.
So, there are two reasons that I am not going to reveal what I would do for the next decade with my investments. First, I have no interest in freely distributing that information in advance. Second, I simply do not know yet what I will do across the entire decade.
If there is one strategy that is assured to eventually perform far below average, it is “buy and hold.” Even average investors occasionally re-allocate as new technologies and industries develop. Who would seriously have suggested in the 1970s that buying 8-track audio cassettes and holding them for the next few decades would be the best investing strategy across that entire period? As technology shifts, so do investors. Eventually, obsolete items may become popular again and unusually valuable as rare collector’s items, but one decade’s sentimental antique collectible may turn in to another decade’s game show trivia. For instance, are telegraphs very valuable today or traditional butter churns? “Buy and hold” is a strategy with a long and established history of below average performance.
What may interest you is a partner who is both motivated and intelligent (prudent!). Who can be relied on to consistently produce above average results except for a prudent partner? Most professionals simply lack the mutual interest to even apply all of their possible intelligence, given their vested conflicts of interest as licensed agents of companies that are paying them commissions to sell investments that serve the best interest and profit margins of the companies paying those commissions, even at the expense of those imprudent enough to buy and hold them.
I invite you to select a partner who you recognize as distinctively prudent. If you are interested in consulting with me, before you contact me, note that I may also be selective in my choice of partners. After all, I am not getting a commission to push and dump some imprudent investments on the mainstream masses. As a partner receiving a share of the profits produced, I have a vested mutual interest to reliably maintain above average results… even beyond easy 1600% gains in a decade.
J.R. “Fibonacci” Hunn
(877) 394 2467
(877) EZ Gains
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2 Responses to “Why HUI?”

  1. J R Fibonacci Hunn Says:

    A licensed investment professional raised the subject of what he called “hindsight bias” in regard to this article, as well as a few other criticisms. I had asked him for his feedback. Here is part of my response to him:

    By the way, I did not specifically predict (in 2003 or at any other time) that HUI would rise 1600% or even that it would rise all decade, nor that it would be the top-performing US stock sector for the decade. I just said (in early 2003) that it was easy to understand the logic of why it could continute to do so well.

    I did not advocate a long-term buy and hold of HUI and I have always been a contrarian swing trader, so I never even really considered holding any liquid investment for an entire decade. I just said (in early 2003) that I favored commodities over stocks overall and especially over real estate… for the “foreseeable” future, and did not define the time period… because I was not clear on the geology of oil yet to make a long-term statement even about that.

    It was in 2004 (“the Real US Deficit: Oil” ) and 2005 (“Worth it’s weight in… OIL!”) that I began to explicitly favor long-term bullishness re crude oil prices and thus relative bearishness re everything else- including gold and silver and so on- and I particularly warned about the emerging “bubble” in gold, which is why I based the title of that latter piece as a parody on the familiar saying “worth its weight in gold.” But, again, I was years ahead of the peak.

    Keep in mind, by the way, that gold still has not made an all-time high in dollar pricing after adjusting for inflation. The whole rally from 2000-2011 in gold is corrective or “counter-trend,” by which I mean that I expect gold to fall below $200 per ounce before it would break $2000, if it ever does, which would probably be based on hyperinflationary collapse of the US dollar, not on anything fundamental about gold itself. (Further, the idea that US government spending and budget deficits must collapse the US Dollar were popular in the 1970s, but were wrong. I still favor the US Dollar, which is deflating rather than inflating due to a contraction in lending markets, over almost all other major currencies, especially over the Euro.)

    So, while I wait until the end of the latest publication (the article above) to assert that “long-term buy and hold” is idiotic (more or less), and I know that I provided no evidence for that, I am expecting people to either recognize the self-evidence of the “idiocy” of “long-term buy and hold” or else, if they do not get it, to explore themselves, even to ask me. That’s trivia to me.

    I did not support it [long-term buy and hold of HUI] and if I am “defending” my omission, it is mostly to admit that I omitted everything I did not mention in order to focus on everything I did. I rarely if ever use any time to demonstrate the “far below averageness” of “long-term buy and hold” because I have read so many excellent demonstrations of that.

    Now, maybe you did not [understand the following], but this was my implication re HUi’s 1600% gain. I am saying that it was trivial.

    I am trivializing it, even if only after parading it around for a while. The 1600% rise of HUI is just a gimmick to attract attention. [Similar to how] many people not long ago made bigger returns than 1600% gains in [only] a decade on down payments for flipping real estate, some people may have made 1600% with long-term cash purchases of HUI.

    Those are just points of reference. Those are just trivia.

    What is about to shift is a far more sudden and dynamic redistribution. When 90% of the masses are wrong and the other 10% benefits from the error, that is distinctive. When 95% are wrong and 5% benefits, that is historic. When 99% are wrong and 1% benefits, that is not trivia.

    Thanks for your interest.

  2. J R Fibonacci Hunn Says:

    I also said the following in contrast to attention on “hindsight bias:”

    How about this bias: the randomness bias? That is the bias that randomness exists. Imagine that 95% of forecasters fail to predict something, and then all of them say “well, it was just a black swan. It was random and could not have been predicted.” That means they are incompetent, right? [And yet we tune in again to their station again or elect them again anyway, right?]

    Or, imagine that 95% of MDs say “scurvy is incurable, diabetes is incurable, MS is incurable, cancer is incurable, autism is incurable, etc.” The other 5% are either more competent or at least more open to the possibility that eventually a new understanding may arise, and so, maybe instead of just being cynical and helpless by calling something incurable, they may say, “well, let’s research it. Maybe there is a cure and we just haven’t found it yet.” (In fact, maybe someone else has already found a “cure” for all of the symptoms covered by the list of diagnostic labels at the beginning of this comment….)

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